Regulators Officially Encourage Borrower Engagement Before Default

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All of the U.S. financial institution regulators and the state banking regulators have issued an interagency statement that encourages financial institutions to work with borrowers who are affected by COVID-19 and provide information regarding loan modifications.

The Fed, FDIC, National Credit Union Administration, OCC, CFPB and state banking regulators say the U.S. has been operating under a presidentially declared emergency since March 13, and as such, the “unique and evolving situation could pose temporary business disruptions and challenges that affect banks, credit unions, businesses, borrowers and the economy.”

“The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19,” the statement reads. “The agencies view loan modification programs as positive actions that can mitigate adverse affects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”

Noting that being proactive is “in the best interest of institutions, their borrowers and the economy,” the agencies confirmed with the Financial Accounting Standards Board (FASB) that short-term modifications made on a good-faith basis to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant.

A “current” loan is one that is less than 30 days past due on payments. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers who are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification.

Read the full joint statement here.

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